Rio to adopt monthly pricing contracts

Rio Tinto
has finally followed rival
BHP Billiton
’s lead on more flexible pricing of iron ore, agreeing to offer monthly contracts to customers as long-term supply deals expire.

The move comes just over a year after annual pricing was replaced with quarterly pricing, introducing added volatility into the price of the steel-making ingredient and to the earnings of producers.

BHP has led the charge for shorter-term pricing of iron ore, including the push to monthly prices, dragging many other large producers towards the new benchmark. (Brazil’s Vale is the notable exception.)

Rio iron ore operations chief
Sam Walsh
has told analysts and investors that while the company will allow monthly pricing it is not interested in playing the swaps market.

Credit Suisse analyst Melinda Moore said Mr Walsh confirmed the miner would increasingly focus on shorter-term spot pricing as it boosts output to 333 million tonnes a year.

UBS analyst Tom Price said just 14 months after annual pricing was replaced with quarterly index-linked pricing, this new mechanism was “already an anachronism, being replaced by a mixture of monthly and spot contracts’’.

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Mr Price said a number of other miners had already followed BHP Billiton into monthly pricing, including Fortescue Metals Group, Atlas Iron, Mount Gibson Iron and Rio Tinto.

Moves to shorter-term pricing have been opposed by European and Japanese steel makers but met with some encouragement from Chinese mills.

Rio Tinto’s marketing chief Warwick Smith said the company would not impose the new terms on customers but would make them available if that was what they wanted.

“We haven’t developed our portfolio approach to the full extent to the way some others have primarily because we are more long-term contracted than our competitors," Mr Smith said.

“But as those contracts expire, and as our expansions kick in, we will have far greater liberty to develop a portfolio approach."

Sources from major Chinese steel mills Baosteel and Maanshan Iron and Steel told The Australian Financial Review yesterday they had not received any monthly offers from Rio Tinto as yet.

“Currently it is all quarterly; only BHP is flexible in pricing," a Bao-steel purchasing source said.

Mr Smith admitted the miner lags BHP Billiton in terms of securing monthly terms, but said this would change.

Ms Moore said Rio also acknowledged that its lump and pellet price premia were under pressure in the third quarter. Rio Tinto said it would not sell lump ore on the spot market until prices improve.

The Baosteel executive said BHP continued to encourage its customers to use the iron ore swaps market to manage price volatility, but that Chinese state-owned companies are forbidden from participating in futures markets overseas.

“BHP always suggest swaps markets to us, but we are state-run," he said.

Glencore chief executive
Ivan Glasenberg
said last week the Swiss trader was keen to bolster its position in the iron ore market given recent developments.

Macquarie analyst Colin Hamilton said views on paper trading remained polarised at a recent conference held in Geneva.

“From the producer angle, Vale reiterated that it saw no need to hedge out price risk, suggesting hedging added volatility, though we note that key market studies show this is not the case," Mr Hamilton said.

But Mr Hamilton said new entrants to the iron ore space might be forced to hedge new production as the market evolved.